Section 179 and Bonus Depreciation for Business Equipment

When a business buys equipment, the general rule is that the cost is capitalized and recovered over time through depreciation. Two provisions allow faster recovery: Section 179 expensing and bonus depreciation. Both can reduce taxable income in the year property is placed in service, but they work differently and have different limits. Recent legislation changed several parameters, so confirm current-year numbers before acting.

Section 179 Expensing

Section 179 lets a business elect to deduct the cost of qualifying property in the year it is placed in service, up to an annual dollar limit. The deduction begins to phase out once total qualifying purchases exceed a threshold. Qualifying property generally includes tangible personal property used in a trade or business, certain software, and some improvements to nonresidential buildings such as roofs, HVAC, fire protection, and security systems. The deduction cannot exceed the business's taxable income from active business, though excess may be carried forward.

Recent legislation increased the dollar limit and phaseout threshold for property placed in service in tax years beginning after 2024, and both are indexed in later years. Owners should verify the numbers that apply.

Bonus Depreciation

Bonus depreciation allows an additional first-year deduction for a percentage of the cost of qualifying property. The percentage had been phasing down under prior law, and recent legislation restored 100 percent bonus depreciation for qualifying property acquired after a specified date in January 2025. Unlike Section 179, bonus depreciation is not limited by taxable income and can create a net operating loss. It applies automatically unless the taxpayer elects out for a class of property, which can be important when planning for future years.

Choosing Between Them

The two provisions can be used together. Some considerations:

• Flexibility. Section 179 is elective by asset and can be tailored to a desired deduction level. Bonus depreciation applies to a whole class unless the taxpayer elects out.
• Income limits. Section 179 is limited by taxable business income, while bonus depreciation is not.
• State conformity. Many states do not follow federal bonus depreciation, or follow it only partly, which can favor Section 179 or slower depreciation at the state level.
• Future years. A large deduction now reduces deductions later, which matters if you expect higher income in coming years.
• Qualified business income. Larger deductions reduce qualified business income, which may affect the Section 199A deduction. See The Qualified Business Income Deduction (Section 199A).

Placed in Service

Timing hinges on when the property is placed in service, meaning ready and available for its intended use, not merely when it is purchased or paid for. Equipment ordered in December but not delivered and installed until January generally is not eligible for the earlier year. Keep delivery and installation records.

Used Property and Vehicles

Used property can qualify for both provisions, provided it meets acquisition requirements. Vehicles are subject to special limits based on weight and use. See Vehicle Deductions for Business Owners. Listed property generally requires more than 50 percent business use to claim accelerated deductions.

Recapture

If property that was expensed is later sold at a gain, the gain up to prior deductions is generally treated as ordinary income. If business use of listed property falls, recapture can occur. These consequences do not eliminate the value of accelerated deductions, but they should be understood.

A Hypothetical Illustration

Suppose a business buys and installs equipment costing 80,000 dollars in the fall. The owner and advisor compare three approaches: deducting the entire cost using Section 179, applying bonus depreciation, or depreciating normally. They model this year's income, expected next year's income, and state conformity. If the current year has unusually high profit and the following year is expected to be lower, faster deductions may look attractive, while a year with low profit might favor slower recovery. The figures are hypothetical and the choice depends on facts.

Buy or Lease

Tax deductions should not be the only reason to buy equipment. Cash flow, financing costs, obsolescence, and business need matter more. A deduction reduces tax by a fraction of the purchase price and does not make a poor purchase a good one.

Questions to Ask

1. What are the current limits for my tax year?
2. Should I use Section 179, bonus depreciation, or both?
3. How does my state treat these deductions?
4. What are the recapture implications if I sell the equipment?

Consider reviewing Year-End Tax Planning Checklist for Business Owners to coordinate purchases with other year-end planning.

Documentation to Keep

Keep the invoice, proof of payment, delivery receipt, and evidence of when the property was placed in service. Maintain a fixed asset schedule listing each asset, its cost, the date placed in service, the method used, and the business-use percentage. If you elect out of bonus depreciation for a class, keep a copy of the election statement. These records support the deduction and make future disposals easier to report accurately.

Coordinate with Financing

If you finance equipment, the deduction generally does not depend on when you pay the loan, but on when the asset is placed in service. Consider how the loan payments compare with the tax savings so that cash flow remains healthy.

Educational purposes only. This page is general education and is not tax, legal, or accounting advice. Tax laws change and outcomes depend on individual facts, so consult a qualified professional before acting. No result is guaranteed.